Indonesian stocks and the rupiah are having a tough day as investors are cautious ahead of the Federal Reserve’s two-day policy meeting (16-17 September), while Indonesia’s August 2015 trade surplus was slightly below analysts’ expectations. By 14:40 pm local Jakarta time, Indonesia’s benchmark Jakarta Composite Index had weakened 1.17 percent to 4,339.07 points, while the Indonesian rupiah had depreciated 0.47 percent to IDR 14,401 per US dollar (Bloomberg Dollar Index).

Similar to yesterday (when the market transactions volume fell to IDR 5.2 trillion), stock trading is calm on the Indonesia Stock Exchange, a clear sign that investors are waiting for news regarding the looming US interest rate hike that will be a key topic during the Federal Open Market Committee (FOMC) meeting this week. Currently, investors and analysts are split on whether the US central bank will raise its key Fed Fund Rate in September or later this year. Although recent US macroeconomic data is solid, the Federal Reserve could jeopardize the recovery of the US economy by making the strong US dollar even stronger (as it negatively affects US exports) if it decides to raise its key interest rate.

For emerging markets, which includes Indonesia, a Fed Fund Rate hike is considered negative as it will most likely result in capital outflows from these markets as US assets become more attractive. However, there is one major positive side to a direct US interest rate hike and that is an end to uncertainty about the timing of the hike. For months markets have been speculating about the hike and this has led to considerable uncertainty and volatile behavior on global financial markets (which became worse after the emergence of widespread concern about the hard landing of China’s economy). Therefore, several central banks in emerging markets requested the Fed to raise its rate as the continuation of persistent uncertainty may do more damage than the actual hike would do (whereas the International Monetary Fund and World Bank actually request the Fed to postpone hiking interest rates).

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia

The Bank for International Settlements is concerned about the fact that companies in emerging economies have assembled a significant amount of US-denominated debt in recent years (as interest rates have been at a historically low level). A Fed Fund Rate hike would make the US dollar even stronger against emerging currencies and this could mean that these companies cannot repay their debt. Regarding the Indonesian rupiah, a Fed Fund Rate hike is expected to push the rupiah beyond the IDR 15,000 per US dollar level.